The move will have cost hedge funds dear. An auction processhad been due to start this week, and Cove stock had been bidwell above PTT's offer price of 240 pence a share inanticipation that Shell would raise its 220 pence offer.

PTT Exploration and Production Pcl is Asia's third-largestoil and gas explorer and Thailand's second-most valuablecompany, but has been overshadowed as a buyer of overseas energyassets by Chinese oil and gas groups.

Newly appointed chief executive Tevin Vongvanich toldReuters in June the firm plans to invest $2.6 billion inSoutheast Asia over the next five years and was on track totriple production to 900,000 barrels per day by 2020.

"Shell Bidco has today decided not to revise its offer of220 pence in cash for each share of Cove, and not take part inthe auction procedure for Cove," Shell said in a statement.

Shell gave no reason for withdrawing, but a source familiarwith the bid process said it did not want to overpay and wasconfident it could get into east Africa gas action by otherroutes.

Analysts say Europe's largest oil and gas group has otheropportunities to secure access to the gas finds off Mozambiqueand Tanzania that were the reason for the takeover attempt.

Cove shares, which closed at 275.5 pence last week, fell13.6 percent on Monday to finish just shy of PTT's offer at238.5 pence after the news.

BOOSTING PRODUCTION

PTT is involved in 41 oil and gas exploration anddevelopment projects. It plans to boost production at existingfields with the start-up of the Montara field in Australia inlate 2012.

Tevin said in June that Cove Energy would play a major rolein helping the group achieve its production target and boostpetroleum reserves to more than 10 years.

"Cove is a good asset and worth the investment," he said.

Shell has much at stake in the LNG market, hence its strongdesire to get involved in potential new supplies. U.S. explorerAnadarko has a 36.5 percent stake in the Mozambiquelicence, but little experience of LNG. A tie-up of some sort haslong been mooted by analysts.

"I would be very surprised if they hadn't talked toeverybody here," said the source, who spoke on condition ofanonymity. "LNG is the hot stuff right now and Shell'sinvestment committees are very aware of it. Something could wellhappen by the end of the year."

Other points of entry to East Africa for Shell could includetie-ups with Italy's ENI, which has also found gas inMozambique, or BG Group and Exxon Mobil, whichhave discoveries off the coast of Tanzania.

Shell and PTT had been heading into the first formaltakeover auction for a listed British company since 2008 afterthe bidding war.

Britain's takeover watchdog ruled on Friday that if neithersuitor had declared its current offer final before 1600 GMT onMonday, an auction would start the next day. That could haveinvolved bids submitted to daily deadlines until a winner wasfound.

It was not just the hedge funds who did not see Shell'swithdrawal coming.

"I was very surprised to see Shell walk," said an investmentbanker who was not involved in the deal. ... I think that Shelldidn't want to take the risk of increasing their offer andgetting trumped by PTT again. They didn't want to end up as thelosers. They must have a plan B around Anadarko or one of thepartners."